Competitive Strategy Essay

â€Å"Successful and unsuccessful strategies shape a company’s destiny† – R.A. Burgelman, Strategy is Destiny†¦ Competitive Strategy is the high-level strategy used by the firm to realize its business goals, and in particular, profitability, in the face of competition. We study competitive strategy within the overall context of technology firms, which operate within a so-called industry, e.g., the computer industry, the consumer electronic industry, the cellular phone industry. Each industry, ideally, serves a market, which denotes the buyers or customers of the products and services offered by the industry. The function of strategy, which has a time horizon of years, is, in general, to set the long-term direction or position of the firm, for example define the technology, product, or service that the firm intends to develop, and determine the intended market for the product or service. The function of planning, which, in general, has a time horizon of sever al months to years, is to translate long-term strategy into medium-term activities, e.g., the portfolio of projects that the firm should execute the time-phased planning of these projects, and resource allocation. The function of operations, which has the time-horizon of days to months, is, in general, to translate medium-term planning activities into short-term product design, development, and delivery activities such as prototyping, manufacturing, product release, and shipment. No company can follow only one strategy. For example, Johnson & Johnson uses one marketing strategy for its common product such as BAND-AID & Johnson’s baby products; and different marketing strategy for its High Tech healthcare products such as Vicryl Plus, antibacterial surgical sutures or NeuFlex finger joint implants. There are several different types of strategy, including competitive strategy, technology strategy, product market strategy, financial strategy, and supply-chain strategy. For a tec hnology company to be successful all these strategies need to be aligned with each other, and with the business goals of the firm. Competitive strategy, is the highest level of strategy in the firm, and is intimately related to the mission and vision of the firm and also to setting the direction for all the other strategies in the firm. There are several schools of strategy formation: design, planning, positioning (Mintzberg, 1998). We focus on two important schools or frameworks for strategy-creation or â€Å"strategy-making† that are particularly important for high-technologycompanies. The first framework is the so-called â€Å"positioning† approach due to Porter (Porter, 1980), In this approach strategy is viewed as taking a generic position in a competitive market and which views strategy-making as an analytic process performed at the industry-market structural level (Porter, 1980) and the resulting dynamics between functional groups of players (e.g., competitors, suppliers) in the industry. The second framework analyzes strategy-making at the industry-level, company level, and intra-company level using evolutionary organization theory (Burgelman 2002). In this evolutionary organizational theory approach, each company is an organizational ecology within which strategy emerges through two basic mechanisms, external selection and internal selection. When companies start, because they are new and small ¸ the external selection mechanism dominates. As a company grows in size and becomes more established, internal selection plays an important role. Based on e volutionary organization theory, views strategy-making as an evolutionary process performed at three levels: industry-company level, company-level, and intra-company level. When these two frameworks are combined, an integrated approach to competitive strategy emerges: from industry-market level all the way to intra-company level. A unique aspect of creating competitive strategy for a company, and in particular, a high-technology company, is that the time-scales for the evolution of markets, industries, and technologies are, in general, much shorter (â€Å"faster†) compared to other industries. Therefore, the strategy frameworks of the positioning school needs to be augmented with functional maps (Clark and Wheelwright, 1993), which capture the evolution of the market, industry, and technology relevant to the company, and which can therefore be used to create strategy. The objectives of this chapter are as follows: 1. Describe the positioning framework for the creation of competitive strategy. 2. Provide an integrated competitive strategy process which is useful in developing competitive strategy in a technology company. 3. Demonstrate the application of the process of competitive strategy The objective of technology strategy (Clark and Wheelwright, 1993) is to guide the technology company in developing, acquiring, and applying technology for competitive advantage. An important part of technologystrategy is the definition of technical capabilities (e.g., advanced device design, rapid prototyping, automated assembly) that provide competitive advantage. The objective of product/market strategy is to clearly establish the following: define what differentiates the product from its competitors; identify market segments for the product, the customer needs of these segments, and the corresponding products (i.e., product lines) that will be offered to these segments; etc. An important outcome of produc t/market strategy is to define the product roadmap, including sales volume and price, necessary to realize the business goals. However, in the rapidly evolving industry and market landscape of high-technology, competitive strategy, in turn, depends on three levels of â€Å"strategy-making† as follows (Burgelman, 2002): 1. Industry-company level. At this level the firm must determine its strategic position, its core competencies, and its strategic action. 2. Company level: At this level strategy-making involves induced strategy and autonomous strategy. 3. Intra-company level: At this the internal level autonomous strategy is created. In successful companies, it is the tight coupling of strategy these three levels of strategy-making with the highest-level (i.e., industry-market level) competitive strategy that, results in successful strategic action where what the company actually does, e.g., the product lines it develops and markets, results in the realization of its business goals. It is also useful to mention two other strategies that are closely related to competitive strategy. Financial strategy in cludes issues such as capital budgeting and portfolio management, i.e., deciding on which technology and product development projects to fund in order to maximize the cumulative expected profit. Another important and related strategy is supply chain strategy (Chopra), which specifies the service, distribution, and operations functions, performed either in-house or outsourced, that the company should do well in order to successfully realize its intended competitive strategy. The â€Å"Positioning† Framework We first present a historical overview of the positioning or analytic school of strategy. Then, we develop the five forces framework (Porter, 1980) and the approach to creation of competitive strategy that is closely related to the five forces framework. We will use the personal computer industry to illustrate the approach. The positioning school of strategy which emerges from the competitive school is based on the following assumptions (Mintzberg, 1998): the marketplace is competitive strategy is a generic position in the marketplace; strategy formation is the selection of a generic position based on analysis. The underlying assumption is that industry or market structure drives position which drives the organizational structure of the firm. Matrices like the Boston Consulting Group (BCG) introduced two techniques: the growth-share matrix, and the experience curve. The growth-share matrix for a firm, developed in the early 1970s, is a 2Ãâ€"2 matrix with â€Å"growth† along one dimension, and â€Å"market share† along the other dimension. Each of these variables can take two values, â€Å"high† or â€Å"low† resulting in a 2Ãâ€"2 matrix. Therefore, the product portfolio of a firm can be decomposed into four combinations of growth and market share, each with a well defined meaning: (High growth, high market share) or â€Å"stars†, (high growth, low share) or â€Å"question marks†, (slow growth, high share) or â€Å"cash cows†, and (slow growth, low share) or â€Å"dogs†. The approach to strategy using this matrix would be to have a portfolio balanced mainly between cash cows (the stable business of the firm, e.g., â€Å"MAC† computers in the case of Apple) and stars (e.g., the iPod, in the case of Apple). The experience curve, developed in 1965-66, is based on the idea that accumula ted experience by a firm influences costs and prices. The claim â€Å"for the experience curve was that for each cumulative doubling of experience, total costs would decline roughly 20% to 30% because of economies of scale, organizational learning, and technical innovation† (Ghemawat, 1999). In 1971, the consulting firm McKinsey came up with the GE/McKinsey nine-block matrix called the Industry Attractiveness-Business Strength matrix (Ghemawat, 1999), which plotted business strength [High, Medium, Low] along one axis, and industry attractiveness [High, Medium, Low] along the other axis. The basic idea was to divide the company into â€Å"strategic business units (SBUs)†, and then make the appropriate strategic recommendations for each SBU depending on its â€Å"location† in the matrix. The Five Forces Framework and Competitive Strategy In this framework there are two high-level stages in the creation of competitive strategy, each stage corresponding to a high-level determinant of profitability mentioned in the previous section. The first stage is the assessment of the attractiveness of the industry in which a given company is embedded based on a structural analysis of the industry. In this stage, called the five forces framework, five forces that influence industry attractiveness are identified, as well as the factors (e.g., number of competitors, size of competitors, capital requirements) that determine the intensity of each force and therefore the cumulative intensity of the five forces. The purpose of the five forces framework is to relate the degree (or intensity) of competition in a given industry, as qualitatively measured by the combined strength (or intensity) of five forces, to the attractiveness of the industry, defined as its ability to sustain profitability. Based on the structural analysis, a particula r company may be in a very attractive industry (e.g., pharmaceuticals) or in an unattractive industry (e.g., steel). However, though a firm exists in an unattractive industry, it can still be highly profitable by choosing the proper competitive position within the industry, for example, e.g., a mini-mill such as Nucor in the steel industry in the nineteen-eighties (Ghemawat). The second stage of strategy creation addresses the competitive strategy available to the firm in order to achieve a strong competitive position. Ideally, a firm would want to be in a very attractive industry (e.g., pharmaceuticals) and have a strong competitive position (e.g., large pharmaceutical firms such as Smith Klein or Glaxo) within the industry. The five forces framework for the structural analysis of an industry is as follows. First, we define the following terms used in the structural analysis of the industry: industry, market, competitors, new entrants, substitutes, buyers, and sellers. The term ind ustry denotes (1) the manufacturers (or producers) and (2) the suppliers of a primary product or service, as well as (3) the manufacturers of alternative products and services that could serve as a substitute. For example, the (conventional) personal computer (PC) industry would include PC manufacturers like Dell and Apple, suppliers of semiconductor chips like Intel and Micron, suppliers ofdisc drives like Seagate, suppliers of software such as Microsoft, etc. Substitute products could be pen-based tablet PCs or small hand-held personal digital assistants (PDAs). In the five forces framework described below, manufacturers and producers will designated as (1) competitors in the industry if they already have established products, or (2) new-entrants if they are trying to enter the industry, or (3) substitutes, if they provide alternative (substitute) products. The term market denotes the buyers (or customers) of the product or service. For example, the market for PCs would include enterprises and individual consumers. The analytical process of strategy analysis and creation can be decomposed into the following five steps. 1. Create a map of the industry in which the technology company is em bedded. There are five key sets of players that constitute the business landscape: competitors, new entrants, substitutes, suppliers, and buyers. Identify key players (companies) for each industry. 2. Perform a five forces analysis of the industry structure. The five forces that influence the intensity of competition in a particular industry, and therefore the profitability of the firms within the industry: Force 1: the degree of rivalry (or competition) between the competitors; Force 2: the threat of new entrants (or the inverse of this force, the barrier to entry); Force 3: the threat of substitutes; Force 4: Buyer Power (to demand lower prices); Force 5: Supplier Power (to increase material prices). For each force, determine the key structural determinants which affect the intensity of the force. Porter and Ghemawat provide a detailed set of the determinants for each force, some of which are given in the table below. In the last column of this table we indicate plausible values o f each force for the PC industry in the nineteen nineties. Table 1 |Force |Key Determinants |Strength of the force | |Rivalry between competitors |Concentration (number) and size of |Medium to high | | |competitors | | | |Fixed costs/value added | | | |Brand indentity | | |Barrier to entry |Economies of scale |Medium to high | | |Brand identity | | | |Capital requirements | | |Threat of substitutes |Price/Performance of substitutes |Low to medium | | |Switching costs | | |Buyer Power |Buyer concentration | | | |Buyer size (volume) |Medium to high | | |Switching costs | | |Supplier Power |Supplier concentration |Low to medium | | |Supplier size (volume) | | | |Switching costs | | In theory, one would, qualitatively determine the strength of each force, as indicated in the third column of the above table, and then determine the cumulative or combined intensity of the five forces. The collective intensity or strength of the forces will determine the structural strength of the industry, as characterized by attractiveness, or the profit potential of the industry. The profit potential is measured by the long term return on invested capital (ROIC). If the collective strength of the forces is high, as in the steel industry, then the corresponding profit potential or attractiveness is low, and vice-versa. At one extreme of this analysis is the perfectly competitive free market, where there are numerous firms alloffering very similar products that cannot be differentiated (therefore, the force of rivalry is high), entry is free (therefore, the threat of both new entrants and substitutes is high), and bargaining power of both suppliers and buyers is low. Using the PC industry of the 1990’s as an example, the qualitative values of the forces shown in the last column of the above table would lead one to conclude that the cumulative strength of the five forces was medium to high, and therefore the attractiveness of the industry, i.e., its profitability, was medium to low. The PC industry in the nineteen-nineties would therefore not be attractive to new entrants, and in fact, in the early 2000s, HP’s computer business was unprofitable, and IBM sold its computer business to Lenovo. (It is important to note that HP’s unprofitability in computer business in the early 2000s cannot be attributed solely to industry attractiveness being low, but is also due to issues associated with its acquisition of the computer company Compaq.) 3. Select a competitive positioning strategy The basic premise of Porter and Hall was that for a firm to be successful (in a market) it had to compete based on one of two sources of competitive ad vantage: cost, i.e., by providing low cost products, or differentiation, i.e., by differentiating its products from its competitors with respect to quality and performance. Porter also proposed that a firm needs to select its strategic target: either offering a product to the entire market (â€Å"market-wide†), or offering a product for a particular market segment. Using these two dimensions (source of competitive advantage, and strategic target), Porter proposed the following three generic competitive strategies: 1. Cost Leadership: offering the lowest costs products to the entire market 2. Differentiated: offering highly unique products (as perceived by the customer) to the entire market 3. Focus: offering products which serve the needs of a niche segment of the market Porter’s claim is that for a company to be successful in the industry in which it operates it must choose between one of the three generic strategies: cost leadership, differentiated, and focus. If one uses the personal computer industry in the US during the 1990’s as an example, then the competitive strategies of the major players was as follows: Dell was the low-c ost leader; HP had a differentiated strategy with high-quality products; Apple had a focus strategy, targeting a narrow marketsegment of users who whom the user-experience (look, feel, and graphical user interfaces) were extremely important; and IBM had a mixed strategy. 4. Link competitive strategy to strategic planning (Ghemawat 1999) In order for a company to derive competitive advantage (or position) within its industry, the company needs to maximize, relative to it competitors, the difference between the buyer’s willingness to pay and the costs incurred in delivering the product to the buyer. Therefore, the next step in the competitive analysis is for the company to link competitive strategy to strategic planning by analyzing all the activities involved in differentiation and cost, and, to this end, a value chain (Porter, 1985) is an extremely important tool. According to Porter, â€Å"the value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation.† A three step process for using these activities, first to analyze costs, then to analyze buyer’s willingness to pay, and finally to explore different strategic planning options to maximize the difference between willingness to pay and cost, is developed in (Ghemawat, 1999). 5. Competitive strategy needs to evolve, especially in a high-technology company where markets, industries, and technologies, are changing relatively rapidly. A good example of the evolution of competitive strategy is IBM’s strategic decisions to evolve from a product-based company in the early nineties to a services-led company at the present time. In the early nineties, when the company was in trouble, IBM closely examined its business model and strategic direction, and decided to â €Å"stay whole† by moving its focus from products and hardware to solutions. One result of this strategic shift was the creation of IBM Global Services in the mid-nineties. By the late-nineties the company moved into e-business solutions, and extended this model in the 2000’s to â€Å"business-on-demand†. One result of these shifts in strategy was IBM’s decision to exit the Personal Computer Market by selling its PC business to Lenovo. Functional Maps A functional map essentially is a time-based evolutionary map of a key metric for an important organizational function, e.g., a product performance metric map for the engineering function in a technology firm, e.g., the well-known Moore’s Law in the semiconductor industry. Since the time-scales for the evolution of markets, industries and technologies for technology companies, especially â€Å"high-tech† companies, is short compared to other industries, the creation of the appropriate functional maps is critical to strategy formation in a technology company. As an example, in the relatively short span of four decades, information technology evolved from mainframes through workstations, servers and personal computers to internet-based and mobile computing. An important feature of our approach to developing competitive strategy in a technology firm is the integrated approach to strategy for a technology company, which relates company strategy to the company’s busin ess goals, business strategy, technology strategy, and product marketing strategy. Since, markets, industries, technologies, and products for a technology company are continually evolving, an important concept that plays a vital role in the creation of strategy, and, in particular, competitive strategy, is the functional map (Clark and Wheelwright, 1993). Here are some useful â€Å"dimensions† along which to create functional maps for strategy creation: a) Evolution of the industry in which the enterprise operates (changes in technology, customer needs, competitive landscape, etc.) b) Evolution of strategy – business, technology, and market – of the enterprise c) Evolution of technology (including manufacturing), product platforms, and product lines of the enterprise. The processes used for technology, product, and process development within the enterprise. d) Growth (or decline) of the enterprise with respect to of market share, revenues, costs, profits, etc. e) Organizational structure of the enterprise f) Key decisions made at different stages in the life of enterprise, and the drivers for these decisions g) The interconnections and relationships between all the above dimensions A multi-dimensional functional map for Intel is given in the next section. A very simple example of how functional maps can shape strategy is in the information technology industry. A functional map of the Information Technology Industry from the 1990s to the 2000s would reveal a shift from â€Å"products† to services†. The Services business in 2007-08 is approximately $750 billion, with IBM, whose share of this market is $54 billion, being the leader. HP, whose own share in the market is $17 billion seeing this shift in the industry and the need to build competitive strength, acquired EDS, whose share of the market is $21 billion. The combined share of HP and EDS would then be $38 billion, allowing it to compete more strongly with IBM. Another simple example of the use of a functional map in creating strategy is in the software industry. In the 2000s the software market is moving from a â€Å"packaged† product to online software, where individuals can get software that is mostly free, supported by advertising. Google is using its leadership on the Web to provide online softwa re that competes with Microsoft’s packaged software. Understanding this shift from packaged to online, and the corresponding change in the revenue model from direct sales (of product) to advertising, Microsoft is aggressively entering the online advertising business. Process for developing competitive strategy in a company If we combine the positioning framework for competitive strategy due to Porter, the evolutionary organization theoretic framework due to Burgelman, and augment these with the creation of relevant functional maps, then the resulting process of developing competitive strategy in a company can be decomposed into four stages, as follows. Stage 1: Company Analysis 1. Establish the business goals and objectives (ROI, %market share, revenue, and growth aspirations). 2. Determine the technology strategy and product market strategy for the company. 3. Define the overall development goals and objectives to align business goals, technology, and market strategies. 4. Develop the functional evolutionary maps of the markets and industry in which the company is embedded. Create functional maps (time-based evolutionary maps) for technology, product market, and manufacturing strategy of the firm. These maps will be useful in the process of assessing and creating competitive strategy. Stage 2: Industry Analysis 1. Perform the structural analysis of the industry in which the company is either an active competitor, or a new entrant, or a substitute. 2. Determine the existing competitive strategy of the company within the industry. 3. Determine the relationships between the company and the other players in the industry Stage 3: Assessment and Evolution of the company’s strategy within the relevant markets and industries 1. Using the functional maps of the overall markets and industry in which the company is embedded, as well as the company specific functional maps, assess the evolution of the company’s competitive strategy. 2. Decide on what the company’s future competitive strategy should be, and the corresponding technology strategy, product market strategy, and manufacturing strategy. Glossary Autonomous Strategy (also see induced strategy). Autonomous strategy refers to actions of individuals or small groups within the company that are outside the scope of current high-level corporate strategy. While autonomous strategy is constrained by the company’s distinctive (core) competencies, it usually (1) involves new competencies that are not the focus of the firm, and (2) results in so-called â€Å"disruptive technologies† that could change the strategic direction of the firm (Burgelman, 2002). Company Structure (vertical vs. horizontal). A vertical company is one which uses only its own proprietary technologies. A horizontal company is one which (usually because of the existence of open-standards) which does not solely rely on its own proprietary technologies, but usually uses technologies and products from other suppliers. In the computer industry, traditionally, Apple is an example of a vertical company, while Dell is an example of a horizontal company. The co mputer industry, itself, moved from a vertical structure to a horizontal structure in the 1980s (Ghemawhat, 1999). Corporate Strategy (official corporate strategy). Corporate strategy is top management’s view of the basis of the company’s success. It includes distinctive (core) competencies, product-market domains, and core values (Burgelman, 2002) Industry. The term industry, e.g., the consumer electronics industry,denotes (1) the manufacturers (or producers) and (2) the suppliers of a primary product or service, as well as (3) the manufacturers of alternative products and services that could serve as a substitute (Porter, 1980). Market. The term market denotes the buyers (or customers) of the product or service. Typically markets are segmented, for example, a two-dimensional segmentation based on the types of product (product segmentation) along one axis, and the types of customers (customer segmentation) along the other axis. The market, as represented by â€Å"Buyers† is an important part of the industry analysis in Porter’s framework. Once you’ve established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate the m in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas: 1. Product 2. Distribution 3. Pricing 4. Promotion 5. Advertising Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we’ve already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but why your strategy will work. [pic] References Burgelman, R.A., â€Å"Strategy is Destiny†, The Free Press, New York, 2002. Chopra, Sunil, and Peter Meindl, â€Å"Supply Chain Management, Strategy, Planning, and Operations†, Third Edition, Pearson Prentice-Hall, 2007. Clark, K. B., and S.C. Wheelwright, Managing New Product and Process Development, Text and Cases, The Free Press, New York, 1993. Edwards, Cliff, â€Å"Intel†, Business Week, March 8, 2004, Pages 56-64. Ghemawat, Pankaj, Strategy and the Business Landscape, Text and Cases, Addison Wesley, 1999. Mintzberg, Henry and Bruce Ahlstrand, and Joseph Lampel, Strategy Safari, The Free Press, New York, 1998 Porter, Michael, Competitive Strategy, New York, The Free Press, 1980 Porter, Michael, Competitive Advantage, The Free Press, New York, 1985 ———————– Figure 1: A strategic view of the technology firm, showing different types of strategy Revenue ($), Growth (%), Etc. Purpose of the company Financial Strategy Competitive Strategy Market Strategy Technology Strategy Business Goals †¢ Vision †¢ Mission